Question

(9) To determine what/how a community determines levels of public goods, we discussed the application of three theories (or principles) and how they interact with each other. Explain these three and using the concepts that we employed in our in-class exercise, provide a rationale for why the system we have works in defining what individuals are willing to pay for certain public goods. What are some of the inherent flaws with this system? Government expenditures can be measured by examining the direct costs, as well as the results from the respective productions for direct outputs and consumer outputs. Please describe the relationship of production functions in analyzing the cost of government services. Using a public good or service that we've discussed, provide examples of inputs used in the services and the types of outputs that could be measured. (10)

Answer 1

Solution 9

A commodity or servuce that is provided without profit to all members of society is called public good. Characteristics of public good include its non excludablity and non rivalry. For example water is public good however if water is excessively used by certain set of people then it leads to acute shortage for other set of people and thus is an example of negative Externalities in this case as third party incurrs a cost. Thus government intervenes and introduces cap on per households consumption limit to avert such situations

Solution 10

Communities define level of public good in basis of following :

• No information about members contribution
• Aggregate information about members contribution
• Individualized information about members contribution

Thus from experimental analysis we find that contribution from individualised information is higher than no information and aggregate information.

Individual are willing to pay for good provided it is non rivalrous and non excludable. However lack of government intervention at necessary time and lack of information is biggest flaws of the system.